Longhorn Company reports current E&P of $115,000 in 20X3 and a deficit of ($230,000) in accumulated E&P at the beginning of the year. Longhorn distributed $345,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $115,000. How is the distribution treated by the shareholder in 20X3?

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The distribution is treated as a dividend to the extent of Longhorn's current E&P of $115,000. This means that $115,000 of the distribution is taxable as a dividend to the shareholder. The remaining $230,000 of the distribution is treated as a tax-free return of basis, since it does not exceed the shareholder's tax basis in his stock. Finally, since the distribution exceeds the shareholder's tax basis, the excess of $115,000 is treated as a long-term capital gain. Therefore, the distribution is $115,000 dividend, $115,000 tax-free return of basis, and $115,000 capital gain.

Longhorn Company Reports Current E&P of $115,000 in 20X3 and a Deficit